KCK Industries NSE SME IPO review (May apply)

•    KIL is in the trading activities for textile-related materials and chemicals. 
•    It posted inconsistent performance with minuscule profits from FY19 to FY21.
•    Super earnings for 9M-FY22 raise eyebrows.
•    Based on recent earnings, the issue is fully priced. 
•    Risk seeker/cash surplus investors may consider for the long term.

ABOUT COMPANY:
KCK Industries Ltd. (KIL) is engaged in the business of trading and distribution of high-quality combed and carded cotton yarns ranging from Ne 4 to Ne 40 in single and multifold and knitted fabrics. These yarns are suitable for applications such as apparel, undergarments, Terry Towels, Denims, Medical Fabrics, Furnishing Fabrics and Industrial Fabrics. The company supplies to customers, who are in fields like the apparel and garment industry, industrial fabrics, furnishing fabrics, towels, Denim etc. 

It has a dedicated team for testing and quality control which undertakes rigorous testing and Quality Management. The trading Business segment of KIL also includes trading and distribution of high-quality chemicals and dyes for the textiles industry, leather, and paper industries. It also deals in Construction Chemicals. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 3.36 cr.) and general corporate purposes (Rs. 0.84 cr.), KIL is coming out with a maiden IPO of 1500000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 4.50 cr. The issue opens for subscription on June 27, 2022, and will close on June 30, 2022. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.27% of the post-IPO paid-up capital of the company. KIL is spending Rs. 0.30 cr. for this IPO process.

The issue is solely lead managed by Navigant Corporate Advisors Ltd. and Cameo Corporate Services Ltd. is the registrar to the issue. Nikunj Stock Brokers Ltd. is the market maker for this issue.  

Having raised initial equity at par, the company issued further equity shares at Rs. 30 per share in August 2020 and also issued bonus shares in the ratio of 3 for 5 in the same month. The average cost of acquisition of shares by the promoters is Rs. 7.07 and Rs. 7.13 per share. 

Post-IPO, KIL's current paid-up equity capital of Rs. 4.00 cr. will stand enhanced to Rs. 5.50 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 16.50 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KIL has posted turnover/net profits of Rs. 40.95 cr. / Rs. 0.21 cr. (FAY19), Rs. 51.51 cr. / Rs. 0.32 cr. (FY20) and Rs. 39.13 cr. / Rs. 0.19 cr. (FY21). For the nine months of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 1.00 cr. on a turnover of Rs. 44.54 cr. Super profits for 9M-FY22 raise eyebrows. 

For the last three fiscals, it has posted an average EPS of Rs. 0.95 and an average RoNW of 8.10%. The issue is priced at a P/BV of 2.31 based on its NAV of Rs. 13.01 as of December 31, 2021, and at a P/BV of 1.70 based on its post-IPO NAV of Rs. 17.65.

If we annualize FY22's super earnings and attribute it to post IPO fully diluted equity base, then the asking price is at a P/E of 12.40 making it a fully priced issue. The sustainability of such profits going forward raises concern.  

DIVIDEND POLICY:
The company has not declared any dividend since incorporation. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, KIL has shown Shiva Texyarn and GRM Overseas as its listed peers. They are currently trading at a P/E of 9.98 and 24.87 (as of June 20, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
This is the 21st mandate from Navigant Corporate in the last six fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par and the rest with premiums ranging from 1.25% to 54.47% on the debut day.